United States District Court, D. Delaware
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Pamela S. Tikellis, Esquire and A. Zachary Naylor, Esquire of Chimicles & Tikellis LLP, Wilmington, Delaware, Liaison Counsel for the Class. Counsel for Lead Plaintiffs and Co-Lead Counsel for the Class: Blair Nicholas, Esquire, Steven B. Singer, Esquire, Hannah Ross, Esquire, John Rizio-Hamilton, Esquire, Lauren McMillen Ormsbee, Esquire, Stefanie J. Sundel, Esquire, Adam Hollander, Esquire of Bernstein Litowitz Berger & Grossmann LLP and Maya S. Saxena, Esquire, Joseph E. White III, Esquire, Lester Hooker, Esquire, and Brandon Grzandziel, Esquire of Saxena White P.A.
Virginia A. Gibson, Esquire of Hogan Lovells U.S. LLP, Philadelphia, Pennsylvania, Counsel for Defendant KMPG LLP. Of George A. Salter, Esquire of Hogan Lovell U.S. LLP.
Laura Davis Jones, Esquire and James O'Neill, Esquire of Pachulski Stang Ziehl & Jones LLP of Wilmington Delaware, Counsel for Defendant Thomas duPont. Of J. Douglass Baldridge, Esquire and George Kostolampros, Esquire of Venable LLP.
Stephen C. Norman, Esquire and Matthew D. Stachel, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, Counsel for Defendants J.P. Morgan Securities LLC and Keefe Bruyette & Woods, Inc. Of Thomas C. Rice, Esquire, Alexandra C. Pitney, Esquire and Erin E. Rota, Esquire of Simpson Thacher & Bartlett LLP.
Thomas J. Allingham II, Esquire, Robert S. Saunders, Esquire, Stephen D. Dargitz, Esquire and Daniel R. Ciarrocki, Esquire of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware, Counsel for Defendants Wilmington Trust Corporation, Ted Cecala, Donald Foley, David Gibson, Robert Harra, Jr., Kevyn Rakowski, Carolyn Burger, R. Keith Elliott, Gailen Krug, Stacey Mobley, Michelle Rollins, David Roselle, Oliver Sockwell, Robert Tunnell, Jr., Susan Whiting, Rex Mears and Louis Freeh.
David E. Wilks, Esquire, Andrea S. Brooks, Esquire and Douglas J. Cummings, Jr., Esquire of Wilks, Lukoff & Bracegridle, LLC of Wilmington, Delaware, Counsel for Defendant William North.
ROBINSON, District Judge.
By an order dated March 7, 2011, the court consolidated a series of securities fraud class action lawsuits filed against the Wilmington Trust Corporation (" WTC" ) and related defendants. (D. I. 26) A consolidated class action complaint was filed on May 16, 2011. (D.I. 39) On March 29, 2012, the court granted defendants' motions to dismiss without prejudice. (D.I. 85, D.I. 86) Plaintiffs filed a second amended complaint on May 10, 2012. (D.I. 88) Before briefing was completed on defendants' motions to dismiss, by stipulation and order, plaintiffs filed a third amended complaint adding information into their pleading obtained from unsealed FBI affidavits in connection with a criminal investigation into Michael Zimmerman (" Zimmerman" ), a prominent Delaware real estate developer. (D.I. 115; D.I. 116;
D.I. 120) Again before briefing was completed on defendants' motions to dismiss the third amended complaint, by stipulation and order, plaintiffs supplemented their pleading and filed the fourth amended complaint (" FAC" ), incorporating information obtained from an unsealed Criminal Information (" C.I." ) and Plea against Joseph Terranova (" Terranova" ), a former Vice President/Division Manager of the Delaware Commercial Real Estate Division and a senior Relationship Manager at the WTC. (D.I. 143; D.I. 144; D.I. 149) The FAC contains seven counts, four under the Securities Exchange Act of 1934, 15 U.S.C. § 78a (" the Exchange Act" ), and three under the Securities Act of 1933, 15 U.S.C. § 77a (" the Securities Act" ). (D.I. 149) Presently before the court are defendants' motions to dismiss the FAC. (D.I. 158; D.I. 160; D.I. 162; D.I. 164; D.I. 166) The court has jurisdiction pursuant to 15 U.S.C. § § 77v and 78aa and 28 U.S.C. § § 1331 and 1337.
A. The Parties
Lead plaintiffs in this suit are institutional investors (" plaintiffs" ) that purchased WTC common stock between January 18, 2008 and November 1, 2010 (" the class period" ). (D.I. 149 at ¶ ¶ 25-30) Plaintiffs brought Exchange Act claims against WTC, a bank headquartered in Wilmington, Delaware during the class period  ( id. at ¶ ¶ 31-34), and defendant KPMG, WTC's outside auditor since 2003 ( id. at ¶ 51). Plaintiffs also brought suit against the " officer defendants" who signed WTC's registration statement and documents incorporated into the offering documents, as well as the " audit committee defendants" who signed WTC's registration statement and documents incorporated into the offering documents.
Plaintiffs brought Securities Act claims against WTC, KPMG, certain officer defendants (Cecala, Foley, Harra, and Gibson) and the audit committee defendants. ( Id. at ¶ ¶ 392-402) Also named as defendants were non-audit committee board members. Rakowski served as senior vice president and the controller of WTC from 2006 through the class period. ( Id. at ¶ 395) Rakowski signed the WTC's registration statement, as well as the 2007, 2008, and 2009 10-Ks, which were then incorporated into the offering documents. ( Id. ) Mears served as a director of WTC since 1992 and was a member of the board at the time of the filing of the offering documents. ( Id. at ¶ 397) Mears also signed the WTC's registration statement and its two amendments, as well as the 2007, 2008, and 2009 10-Ks, which were then incorporated into the offering documents. ( Id. ) DuPont served as a director from 2006 through October 2009 and signed WTC's registration statement  and 2007 and 2008 10-Ks, which were incorporated into the offering documents. ( Id. at ¶ 398) Freeh served as a director beginning in 2009 and signed the 2009 10-K which was incorporated into the offering documents. ( Id. at ¶ 399) J.P. Morgan Securities LLC (" JP Morgan" ) and Keefe Bruyette & Woods, Inc. (" KBW" ), joint underwriters for the offering, were also named as defendants. ( Id. at ¶ ¶ 401-402)
1. Officer defendants
The officer defendants include Cecala, Foley, Gibson, Harra, and North. ( Id. at
¶ ¶ 35-40) Cecala served as WTC's chief executive officer (" CEO" ) from July 1996 until June 3, 2010; he was also the chairman of the board from 1996 until July 19, 2010. ( Id. at ¶ 35) Foley replaced Cecala as CEO and chairman of the board. ( Id. at ¶ 36) Gibson served as WTC's chief financial officer from 1997 until November of 2010. ( Id. at ¶ 37) Harra served as the executive vice president of WTC from 1992 until 1996 and as president from 1996 through the class period; he also served as the chief operating officer from 1996 until 2010. ( Id. at ¶ 38) North served as the chief credit officer at WTC from 2004 until July 2010. ( Id. at ¶ 39)
2. Audit committee defendants
The audit committee defendants include Burger, Elliott, Krug, Mobley, Rollins, Roselle, Sockwell, Tunnell, and Whiting. ( Id. at ¶ ¶ 41-50) Burger served as a director on WTC's board from 1991 through the class period. ( Id. at ¶ 42) Burger served on the audit committee from 2001 to 2004 and 2008 through the class period (chair from 2001 to 2004 and 2010). ( Id. ) Elliott was a director from 1997 until 2010 and he served on the audit committee during 2007 and 2008 (2007 chair). ( Id. at ¶ 43) Krug was a director from 2004 through the class period and served on the audit committee from 2007 until 2010. ( Id. at ¶ 44) Mobley served as a director from 1991 until 2010 and was on the audit committee in 2009. ( Id. at ¶ 45) Rollins served as a director from 2007 until May of 2010; she was a member of the audit committee from 2007 to 2009. ( Id. at ¶ 46) Roselle was a director from 1991 until 2009 and worked on the audit committee from 2007-2009. ( Id. at ¶ 47) Sockwell was a director from 2007 to 2010 and served on the audit committee from 2008-2010. ( Id. at ¶ 48) Tunnell was a director from 1992 through the class period and was a member of the audit committee from 2007 until 2008 and in 2010. ( Id. at ¶ 49) Whiting was a director from 2005 through the class period and a member of the audit committee in 2010. ( Id. at ¶ 50)
3. WTC background
WTC had four primary business segments: regional banking; corporate client services; wealth advisory services; and affiliate money managers. ( Id. at ¶ 32) WTC's regional banking segment, whose predominant business was the origination of commercial loans, is the focus of plaintiffs' complaint. ( Id. ) WTC's commercial loans fell into three categories: commercial real estate construction; commercial, financial and agricultural loans; and commercial mortgages. ( Id. ) As of December 31, 2008, the commercial loan balance was 70% of WTC's total loan portfolio and as of December 31, 2009, it was 74%. ( Id. )
According to plaintiffs' complaint, " since its founding in 1903," WTC distinguished itself from other financial institutions as a " conservative" regional lender. ( Id. at ¶ 52) With the emergence of the financial crisis in 2008, WTC continued to highlight its conservatism, claiming in its 2008 annual report that " it had 'succeeded across 105 years of economic cycles' because it 'manage[d] risk conservatively.'" ( Id. ) WTC did this by using " rigorous" and " consistent" underwriting procedures and asset review, leading investors to describe it as risk adverse. ( Id. at ¶ ¶ 52, 57) While this may have been the public persona WTC created and attempted to maintain, plaintiffs claim that WTC's lending practices were actually part of a " massive criminal conspiracy that 'fraudulently conceal[ed] the Bank's true financial condition' and 'deceive[d] regulators and the public.'" ( Id. at ¶ 1)
On November, 1, 2010, WTC announced that it was being acquired by M& T for approximately $3.84 per share, only half its trading price of the previous day, $7.11 per
share. WTC released its third quarter 2010 results, reporting a quarterly net loss of $365.3 million (more than a 200% increase from the loss reported in the second quarter of 2010). ( Id. at ¶ ¶ 34, 198-200) The market reaction was swift, with WTC stock prices dropping to $4.21 on November 1, 2010, causing losses to investors. ( Id. at ¶ ¶ 205- 209)
B. The Claims
As to the Exchange Act, plaintiffs allege violations of Section 10(b) against WTC, Cecala, Foley, Gibson, Harra, and North; violations of Section 10(b) and Rule 10b-5 against KPMG; violations of Section 20(a) against Cecala, Foley, Gibson, Harra, and North; and violations of Section 20(a) against the audit committee defendants. ( Id. at ¶ ¶ 341-86) As to the Securities Act, plaintiffs allege violations of Section 11 against WTC, Cecala, Foley, Gibson, Harra, Rakowski, Burger, Elliott, Krug, Mobley, Rollins, Sockwell, Tunnell, Whiting, Mears, duPont, Roselle, Freeh, KPMG, J.P. Morgan and KBW; violations of Section 12(a)(2) against WTC, J.P. Morgan and KBW; and violations of Section 15 against Foley, Cecala, Gibson, Harra, Rakowski, Burger, duPont, Elliott, Freeh, Krug, Mears, Mobley, Rollins, Roselle, Sockwell, Tunnell, and Whiting. ( Id. at ¶ ¶ 387-477)
C. Factual Background
Plaintiffs allege that the CI evidences that WTC's most senior officers engaged in an " overarching bank fraud conspiracy" that was designed to " fraudulently conceal the [WTC]'s true financial condition in many ways," including by " causing [WTC] to misrepresent its reporting of past due and nonperforming loans." ( Id. at ¶ 54) WTC misstated its past due and nonperforming loans by $105 million, or 35% of its total past due and nonperforming loans as of December 31, 2008. ( Id. at ¶ ¶ 70-72, 220-27) WTC " waived" matured, past due loans by falsely claiming that it was " in the process of extending the loans. However, WTC did not obtain updated appraisals for the loans, as required by federal law  and its own policies. ( Id. at ¶ ¶ 61, 64-66) WTC knew that it could not extend the loans without these updated appraisals, which its officers knew would have " catastrophic consequences" for WTC. ( Id. at ¶ ¶ 74-75) WTC thus reported low amounts of past due loans in its quarterly and annual SEC filings, a key credit metric that indicated to inventors that the credit quality of the portfolio was strong. ( Id. at ¶ ¶ 53, 59) The amount of reported past due loans directly impacted WTC's reported reserve, i.e., the amount of money it set aside each quarter to cover probable losses in its loan portfolio, and its income. ( Id. at ¶ ¶ 62-63) Therefore, as past due loans increased, the reserve increased, and WTC's income decreased on a dollar-for-dollar basis. ( Id. at ¶ ¶ 58, 62-63)
Many of the extensions occurred in the final days of 2009, so that WTC would not have to report its true past due loan figures in its year-end financial statements. ( Id. at ¶ 82) For example, on December 30, 2009, Terranova requested that the loan committee (which included Cecala, Harra, and North) extend multiple loans, with an outstanding balance of $94 million, from a single borrower, until April 2010. ( Id. )
Many of these loans had been delinquent and " in the process of extension" for months. ( Id. ) Cecala, Harra, and North approved the requested extension on the same day, without requiring updated appraisals and despite the fact that the borrower had never executed the extension documents that formed the basis of the request. ( Id. ) When the loans were not repaid, Terranova requested on March 31, 2010 that the loan committee " reaffirm" this extension until December 31, 2010. ( Id. ) Terranova offered no reason for the " reaffirmed" extension other than to state, " [d]ue to timing issues, the extension documents were never executed by the . . . borrower." ( Id. ) Again, the loan committee approved the extension, without requesting updated appraisals for these loans or any other required information. ( Id. )
In 2009, WTC " mass extended" $1,744 billion of past due and soon-to-be-past due loans, without obtaining the necessary appraisals. This mass extension, approved by WTC's loan committee (chaired by North), served to eliminate the loans from WTC's financial statements. ( Id. at ¶ ¶ 80-83) The failure to report the past due loans rendered WTC's publicly reported financial statements to be materially false. ( Id. at ¶ ¶ 162-67) For example, WTC's " 2009 Form 10-K, [filed with the SEC in February 2010], which was incorporated into the Proxy Statement for [WTC's] Offering did not include [WTC's] true past due number and was therefore false . . . ." ( Id. at ¶ 403) Specifically, this false reporting led the market to believe WTC's loan portfolio was in good condition and that WTC had adequate reserves. ( Id. at ¶ ¶ 162-67)
Plaintiffs allege certain emails evidence that senior officers (including Cecala, Harra, Gibson, and North) knew that WTC was misstating its past due loans through the class period. ( Id. at ¶ ¶ 73-79) Further, officer defendants were well aware of the underreporting, as internal delinquency reports were compiled on a monthly basis, provided to North, and circulated to Cecala, Harra, and Gibson. Under Gibson's direction, the " waived" loans were removed from the delinquency reports and then the past due list (used for WTC's publicly reported past due loan figures) was prepared. ( Id. at ¶ ¶ 64-67)
WTC emphasized in SEC filings its " rigorous" underwriting standards and its " regular review of all past due loans" to " mitigate credit risk." ( Id. at ¶ ¶ 91, 135, 161) In the SEC filings, WTC stated:
One of our primary risks is credit risk (the risk that borrowers will be unable to repay their loans). To mitigate this risk, we:
o Employ rigorous loan underwriting standards and apply them consistently.
. . .
o Monitor the portfolio to identify potential problems and to avoid disproportionately high concentrations in any single ...